DIT

AMCON Distributing Co. - 10-Q Summary (Q1 2010)

Business Context and Reporting Period

This filing covers the first fiscal quarter ended December 31, 2009. AMCON Distributing Co. operates two primary segments: a wholesale distribution segment (ADC) serving convenience and retail stores in the Central and Rocky Mountain regions, and a retail health food segment operating stores in the Midwest and Florida. The company is a smaller reporting company.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Sales increased 12.2% year-over-year, driven primarily by a 12.8% increase in the wholesale segment. This growth was fueled by a $9.2 million contribution from the acquisition of Discount Distributors and a $32.0 million price increase in cigarette sales, partially offset by a $15.9 million volume decline in cigarette cartons.
• Profitability: Net income available to common shareholders rose 38% to $1.7 million. Operating income increased 11.9% despite a slight compression in gross margin percentage (7.1% vs 7.3%).
• Segment Performance: The wholesale segment saw increased gross profit due to higher tobacco margins and the acquisition. The retail health food segment saw a slight sales decline (0.6%) due to economic weakness in Florida and increased competition, though gross profit improved due to lower throw-out costs.
• Cash Flow: Operating cash flow decreased significantly to $1.3 million from $8.3 million in the prior year, attributed to reductions in accounts payable and accrued expenses, and increased prepaid assets, despite strong earnings.
• Acquisition: The company acquired Discount Distributors for approximately $4.0 million in total consideration (cash, note, and contingent consideration), expanding its footprint in Arkansas, Oklahoma, and Missouri.

Guidance, Outlook, and Risks

• Outlook: Management anticipates that economic conditions, regulatory factors (specifically FDA tobacco regulations), and potential fuel price increases could adversely affect sales and margins. However, the company plans to maintain a conservative strategy of cost containment and liquidity to capture market share.
• Dividends: The company declared a cash dividend of $0.18 per common share, an 80% increase over the prior year's $0.10.
• Liquidity: The company maintains a $55.0 million revolving credit facility with Bank of America (plus term notes). As of December 31, 2009, approximately $25.1 million was available, with $25.5 million outstanding. The company is in compliance with all debt covenants.
• Risks: Key risks include increased excise taxes on tobacco, FDA regulation of tobacco products, manufacturer price increases, customer credit risk, and consolidation trends in the convenience store industry.

Investor Verification Checklist

• Acquisition Integration: Verify the realization of synergies and revenue targets from the Discount Distributors acquisition, including the $1.0 million contingent consideration.
• Tobacco Volume Trends: Monitor the continued decline in cigarette carton volumes against price increases to assess long-term revenue sustainability in the wholesale segment.
• Working Capital Management: Review the significant drop in operating cash flow relative to net income to ensure it is not indicative of deteriorating collection or payment terms.
• Debt Covenants: Confirm ongoing compliance with the debt service ratio covenant (minimum 1.0 to 1.0) given the economic environment.
• Retail Segment Turnaround: Assess the impact of the Florida economic downturn on the retail health food segment and the success of cost-reduction initiatives.